Pension or Lump Sum? Compare Payouts and Options Before You Decide
If you’re eligible for a pension, congratulations. However, you may be able to do better than just taking what you’re offered.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
About half of pension plan participants can choose to take their money in a lump sum when they retire. If you have that choice or are offered a buyout, what’s your best option?
Securing guaranteed lifetime payments directly from your company pension plan would seem to be a no-brainer, unless you’re facing a financial emergency and need the cash right away. However, taking a lump sum and deploying it wisely can give you more control … and sometimes more income.
When making your pension-vs.-lump-sum decision, here are some things you need to consider.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The Case for a Rollover IRA
While the idea of receiving lifetime pension payments from your former employer sounds enticing, a rollover to an IRA can have real advantages. You get more flexibility and can control when you begin receiving retirement income payments and for how long. You can start taking penalty-free payments as early as age 59½ or you can delay them until the year you turn 72, when you must start required minimum distributions.
One important point to keep in mind: If you roll over the lump sum into a standard IRA, you’ll defer taxes on the distribution. Without a rollover, you’ll be hit with a big tax bill the year you receive a sizable sum.
Compare the Payout Amounts
The flexibility an IRA rollover provides doesn’t help much if you can’t generate at least the same amount of secure income on your own as your company pension could. On the other hand, even if your pension plan has the payout features you want, you should compare the income it offers to what you could get with a commercially available annuity.
Ask your employer for the amount of your lump sum and what your monthly pension payments would be. Then, get income quotes from an annuity provider representing multiple annuity companies. This will let you make an apples-to-apples comparison.
In some cases, taking a lump sum and rolling that over into an IRA and then purchasing an income annuity will provide greater income. If you can get a payout that’s slightly higher, it can add up to a lot of money if you collect payments for 20 or 30 years.
How Pension and Annuity Payments are Determined
There’s no magic in a company pension. Pension payments are based on the value of your account and an actuarial determination of your expected lifespan. Gender is typically not considered with pensions, because that’s prohibited by federal law.
Income annuities act like private pensions. In exchange for a single deposit, the insurance company will provide a guaranteed stream of income. An annuity is based on the same math as a pension, except the insurer does consider gender in determining payment amounts. That can disadvantage women because they are expected to live longer.
With annuities, you can choose how long the payments last. While most people choose a lifetime annuity, you can choose a set period, such as 15 years, and receive more annual income. This can be a good choice for people who have other income sources kicking in at a future date or who don’t expect to live to an advanced age.
An immediate income annuity offers payments that can start anywhere from immediately to one year after purchase. With a deferred income annuity, you can delay payments for more than one year. The longer you can afford to delay, the greater the annual income will be.
Do You Trust Your Company Pension Will Be Safe?
There’s also a comfort factor. How comfortable are you in letting your former employer control your retirement assets for the rest of your life?
Some people feel more secure receiving a lump-sum rollover to their IRA, rather than leaving their retirement money with their former employer's pension plan. And sometimes there’s good reason for unease: Some pension plans are underfunded. Most pensions are protected by the Pension Benefit Guaranty Corp., but only up to certain limits. With a multiemployer plan — a pension plan created through an agreement between employers and a union — the maximum annual guarantee through the PBGC is $12,870 for a worker with 30 years of service. That's far less than that person would receive from a solvent plan. For single-employer plans, which cover most people with pensions, for 2020 the maximum single-life benefit for a 65-year-old is $69,750 per year, according to the PBGC table of benefits.
Would You Trust an Annuity’s Insurer More?
A lump-sum payout transfers the risks associated with investment performance and longevity from the pension plan sponsor to the participant. But you can then transfer that risk to the annuity issuer. That’s the advantage of an annuity, as long as you choose a financially strong insurer. The insurers should list its rating from at least A.M. Best and perhaps other rating agencies on its website, which is a good starting point.
You don’t need to invest the entire lump sum in an income annuity. If your income needs are met using only a portion of your lump sum, you can split it between an income annuity and a portfolio of mutual funds or indexed and fixed-rate annuities in an IRA. That combination can provide growth potential while also guaranteeing income.
A rollover has another advantage. Pension payments end when the plan participant or a surviving spouse dies, but funds preserved in an IRA can be passed down to heirs.
The Bottom Line on an Important Decision
Taking a company pension is the course of least resistance, but it’s not always the best option. You may come out ahead if you take a lump sum and convert it into an income annuity yourself. Run the numbers to find out which is the better deal for you.
-
Ask the Tax Editor: Federal Income Tax DeductionsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on federal income tax deductions
-
States With No-Fault Car Insurance Laws (and How No-Fault Car Insurance Works)A breakdown of the confusing rules around no-fault car insurance in every state where it exists.
-
7 Frugal Habits to Keep Even When You're RichSome frugal habits are worth it, no matter what tax bracket you're in.
-
For the 2% Club, the Guardrails Approach and the 4% Rule Do Not Work: Here's What Works InsteadFor retirees with a pension, traditional withdrawal rules could be too restrictive. You need a tailored income plan that is much more flexible and realistic.
-
Retiring Next Year? Now Is the Time to Start Designing What Your Retirement Will Look LikeThis is when you should be shifting your focus from growing your portfolio to designing an income and tax strategy that aligns your resources with your purpose.
-
I'm a Financial Planner: This Layered Approach for Your Retirement Money Can Help Lower Your StressTo be confident about retirement, consider building a safety net by dividing assets into distinct layers and establishing a regular review process. Here's how.
-
The 4 Estate Planning Documents Every High-Net-Worth Family Needs (Not Just a Will)The key to successful estate planning for HNW families isn't just drafting these four documents, but ensuring they're current and immediately accessible.
-
Love and Legacy: What Couples Rarely Talk About (But Should)Couples who talk openly about finances, including estate planning, are more likely to head into retirement joyfully. How can you get the conversation going?
-
How to Get the Fair Value for Your Shares When You Are in the Minority Vote on a Sale of Substantially All Corporate AssetsWhen a sale of substantially all corporate assets is approved by majority vote, shareholders on the losing side of the vote should understand their rights.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to ChanceAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
